
[Federal Register Volume 81, Number 71 (Wednesday, April 13, 2016)]
[Notices]
[Pages 21935-21943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08429]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77557; File No. SR-Phlx-2016-40]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to PIXL

April 7, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 24, 2016, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit

[[Page 21936]]

comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 1080, entitled ``Phlx XL 
and Phlx XL II'' to amend the length of time of a Price Improvement XL 
or PIXL\SM\ Auction and make other rule changes.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Phlx Rule 1080(n) to amend the 
length of time of a PIXL\SM\ Auction and make other clarifying rule 
changes. PIXL is a component of the Exchange's fully automated options 
trading system, PHLX XL, that allows a member to electronically submit 
for execution an order it represents as agent on behalf of a public 
customer, broker-dealer, or any other entity (``PIXL Order'') against 
principal interest or against any other order it represents as agent 
(an ``Initiating Order'') provided it submits the PIXL Order for 
electronic execution into the PIXL Auction (``Auction'). The Exchange 
adopted PIXL in October 2010 as a price-improvement mechanism on the 
Exchange.\3\ The Exchange proposes the below changes.
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    \3\ See Securities Exchange Act Release Nos. 63027 (October 1, 
2010), 75 FR 62160 (October 7, 2010) (SR-Phlx-2010-108) (Order 
Granting Approval to a Proposed Rule Change Relating to a Proposed 
Price Improvement System, Price Improvement XL); 65043 (August 5, 
2011), 76 FR 49824 (August 11, 2011) (SR-Phlx-2011-104) (Extending 
Pilot for Price Improvement System, Price Improvement XL); 67399 
(July 11, 2012), 77 FR 42048 (July 17, 2012) (SR-Phlx-2012-94) 
(Extending Pilot for Price Improvement System, Price Improvement 
XL); 69845 (June 25, 2013), 78 FR 39429 (July 1, 2013) (SR-Phlx-
2013-46) (Order Granting Approval To Proposed Rule Change, as 
Modified by Amendment No. 1, Regarding Complex Order PIXL); 69989 
(July 16, 2013), 78 FR 43950 (July 22, 2013) (SR-Phlx-2013-74) 
(Extending Pilot for Price Improvement System, Price Improvement 
XL); and 72619 (July 16, 2014), 79 FR 42613 (July 22, 2014) 
(Extending Pilot for Price Improvement System, Price Improvement 
XL).
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PIXL Timer
    Today, a PIXL Auction lasts for one second, unless it is concluded 
early.\4\ The Exchange proposes to amend Rule 1080(n)(ii)(A)(4) to 
state, ``the Auction will last for a period of time, as determined by 
the Exchange and announced on the Nasdaq Trader Web site. The Auction 
period will be no less than one hundred milliseconds and no more than 
one second.'' This timer is similar to the current timer length in the 
newly adopted BX PRISM.\5\ The selected timer would be the same length 
of time for all auctions in all options pursuant to Phlx Rule 1080(n).
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    \4\ The PIXL Auction shall conclude at the earlier to occur of 
(1) The end of the Auction period; (2) For a PIXL Auction (except if 
it is a Complex Order), any time the PBBO crosses the PIXL Order 
stop price on the same side of the market as the PIXL Order; (3) For 
a Complex Order PIXL Auction, any time the cPBBO or the Complex 
Order book crosses the PIXL Order stop price on the same side of the 
market as the PIXL Order; or (4) Any time there is a trading halt on 
the Exchange in the affected series.
    \5\ See NASDAQ BX, Inc. (``BX'') Rules at Chapter VI, Section 
9(ii)(A)(3).
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    The Exchange believes that a shorter duration of time for the 
Auction will reduce market risk for all members executing trades in 
PIXL. Initiating Participants are required to guarantee an execution at 
the NBBO \6\ or at a better price, and are subject to market risk while 
their PIXL Order is exposed to other Phlx members. While other 
Participants are also subject to market risk, those providing responses 
in PIXL may cancel or modify their orders. Phlx believes that the 
Initiating Participant acts in a critical role within the PIXL Auction. 
Their willingness to guarantee the orders entered into PIXL an 
execution at NBBO or a better price is the keystone to an order gaining 
the opportunity for price improvement. Phlx believes that allowing for 
an Auction period of no less than one hundred milliseconds and no more 
than one second will benefit members trading in PIXL. Phlx believes it 
is in these members' best interests to minimize the auction time while 
continuing to allow members adequate time to electronically respond. 
Both the order being exposed and the responding orders are subject to 
market risk during the Auction.
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    \6\ For Complex Orders, Initiating Members are required to 
guarantee an execution at the cPBBO or better.
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Immediate or Cancel
    The Exchange is amending the Phlx Rule 1080(n) to remove certain 
uses of the term ``rejected'' to instead refer to the term 
``immediately cancelled.'' Specifically, the Exchange is amending Phlx 
Rule 1080(n)(ii)(A)(8)-(10). These orders are not rejected, rather they 
are immediately cancelled because technically they are accepted into 
the trading system. The Exchange believes this non-substantive change 
adds more clarity to the rule text. This distinction is made throughout 
the newly adopted BX PRISM rule, where applicable.\7\
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    \7\ See BX Rules at Chapter VI, Section 9.
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    The Exchange notes that its proposed rule text at Rule 
1080(n)(ii)(A)(9) states that a PAN or Complex Order PAN response which 
is inferior to the stop price of the PIXL order will be cancelled. In 
this particular instance, the order is not immediately cancelled to 
prevent information leakage as to possible stop price. The order is 
cancelled at the end of the Auction instead.
Allocations
    The Exchange is amending Phlx Rule 1080(n)(ii)(A)(1) to first make 
clear that under no circumstances will the Initiating Participant 
receive an allocation percentage, at the final price point, of more 
than 50% with one competing quote, order or PAN response or 40% with 
multiple competing quotes, orders or PAN responses, when competing 
quotes, orders or PAN responses have contracts available for execution. 
This change adds more clarity to the rule text as this limitation is 
present today. The Exchange recently included this clarifying rule text 
in the newly adopted BX PRISM rule \8\ and seeks to conform the PIXL 
rule text to that of BX PRISM.
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    \8\ See BX Rules at Chapter VI, Section 9(ii)(A)(1).
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    The Exchange is also amending Phlx Rule 1080(n)(ii)(E)(2)(b) and 
1080(n)(ii)(E)(2)(c)(ii) to provide more specificity concerning the 
allocation to which an Initiating Participant is entitled. The 
amendments make clear that the allocations can be either 40% or 50% 
depending on whether there are one or more competing quotes, orders or 
PAN responses. Also, the rule text notes that public customer interest 
must be satisfied first. This change adds more clarity to the rule text 
as this allocation method is present today. The Exchange recently 
included this clarifying rule text in the newly adopted BX PRISM

[[Page 21937]]

rule \9\ and seeks to conform the PIXL rule text to that of BX PRISM.
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    \9\ See BX Rules at Chapter VI, Section 9(ii)(E)(2)(b), 
(ii)(E)(2)(c)(ii), (ii)(F)(2)(b) and (ii)(F)(2)(c)(ii).
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Stop Price
    The Exchange is amending Phlx Rule 1080(n)(ii)(C) to revise 
language where the entire PIXL Order will be executed at, including, in 
the case of the internal BBO (``Reference BBO'') crossing the PIXL 
Order stop price, the best response price(s) or, if the stop price is 
the best price in the Auction, at the stop price, unless the best 
response price is equal to or better than the price of a limit order 
resting on the PHLX book on the same side of the market as the PIXL 
Order, in which case the PIXL Order will be executed against that 
response, but at a price that is at least one minimum price improvement 
increment better than the price of such limit order at the time of the 
conclusion of the Auction. This new ``better than'' language is 
currently also utilized in the newly adopted BX PRISM rule.\10\ The 
Auction would look for the best price, which is this instance may be 
through a limit order on the same side as the PIXL Order.
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    \10\ See BX Rules at Chapter VI, Section 9(ii)(C).
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    For example, assume the Reference BBO and NBBO are both .97-1.03. A 
PIXL Order to buy 100 contracts is submitted with a contra-side 
Initiating Order to stop the PIXL Order at 1.01. Assume a PAN response 
is submitted to sell 10 contracts at .97 and another to sell 10 
contracts at 1.00. Then assume an unrelated buy order is received to 
pay .98 for 10 contracts. The order is placed on the PHLX book and the 
Reference BBO becomes .98-1.03. Then assume, a participant submits a 
quote of 1.02-1.05, crossing the 1.01 stop price on the same side of 
the PIXL Order and concluding the PIXL Auction prior to the expiration 
of one second. Therefore, 10 contracts from the PIXL Order will be 
executed at .99 against the best response price of .97 which is `better 
than' the price of the .98 limit order resting on the PHLX book on the 
same side of the market as the PIXL Order. Also, 10 contracts will be 
executed at 1.00 (the next best response price after the execution at 
.98) and the remaining 80 contracts will be executed at 1.01 (the stop 
price) against the Initiating Order. The Exchange believes that this 
language clarifies the current rule text by providing the ``better 
than'' language, which accounts for responses that are priced more 
aggressively than a later arriving resting limit order on the book.
Professional Order
    The Exchange is amending Phlx Rule 1080(n) in the first paragraph 
and also 1080(n)(ii)(E)(1) to make clear that a public customer order 
does not include a professional \11\ order. Professionals are not 
entitled to priority as described within the Phlx Rule 1080(n). This 
non-substantive change adds more clarity to the rule text. The Exchange 
recently included this clarifying rule text in the newly adopted BX 
PRISM rule \12\ and seeks to conform the PIXL rule text to that of BX 
PRISM.
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    \11\ Phlx Rule 1000(b)(14) currently states that the term 
``professional'' means any person or entity that (i) is not a broker 
or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s).
    \12\ See BX Rules at Chapter VI, Section 9 in the first 
paragraph and also at Section 9(ii)(E)(1).
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Rounding
    The Exchange is amending Phlx Rule 1080(n)(ii)(E)(2)(f) to add 
clarifying rule text concerning the manner in which the Exchange will 
round shares and allocate remaining contracts, commonly known in the 
industry as odd lots.\13\ Rule 1014 provides for the manner in which 
the Phlx XL electronic match engine (hereinafter ``System'') allocates 
simple interest. Within Rule 1014, the Exchange allocates shares in 
Price-Time priority \14\ first to public customers. Thereafter, the 
Exchange allocates interest to Specialists \15\ and Registered Options 
Traders \16\ (hereinafter collectively ``ROTs'') utilizing a pro-rata 
allocation model.\17\ Finally, the Exchange allocates remaining 
interest to off-floor broker dealers \18\ also utilizing a pro-rata 
allocation model.
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    \13\ The Exchange rounds shares and allocates remaining shares 
in the manner described herein. This rule change memorializes this 
practice within its rules.
    \14\ Price-Time allocations are filled among Customer Orders in 
time priority.
    \15\ A Specialist is an Exchange member who is registered as an 
options specialist. See Phlx Rule 1020(a).
    \16\ A Registered Options Trader (``ROT'') includes a Streaming 
Quote Trader or ``SQT,'' a Remote Streaming Quote Trader or ``RSQT'' 
and a Non-SQT, which by definition is neither a SQT nor a RSQT. A 
ROT is defined in Exchange Rule 1014(b) as a regular member of the 
Exchange located on the trading floor who has received permission 
from the Exchange to trade in options for his own account. See 
Exchange Rule 1014(b)(i) and (ii).
    \17\ Pro-rata allocations may result in remaining shares as 
orders are allocated based on the size of the orders as a percentage 
of the total size among all interest at that price level.
    \18\ The term ``off-floor broker-dealer order'' means an order 
delivered from off the floor of the Exchange by or on behalf of a 
broker-dealer for the proprietary account(s) of such broker-dealer, 
including an order for a market maker located on an exchange or 
trading floor other than the Exchange's trading floor delivered for 
the proprietary account(s) of such market maker.
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    The Exchange proposes to precisely describe that, with respect to 
pro-rata allocations, the Exchange will round shares down to the 
nearest integer when determining the amount of the allocation in Rule 
1080(n)(ii)(E)(2)(f). The Exchange believes that this detail will 
provide market participants with information to determine the method in 
which the Exchange shall allocate remaining shares.
    The Exchange proposes to amend Rule 1080(n)(ii)(E)(2)(f) to add 
rule text to describe the manner in which remaining shares will be 
allocated for ROTs and also for off-floor broker dealers. If remaining 
shares result, from the allocation of simple interest among equally 
priced ROTs, remaining shares are allocated by daily random assignments 
of ROTs. Each ROT is assigned an order of allocation, each trading day. 
Trading interest, which includes orders, quotes and sweeps, are 
allocated in accordance with the trading day's order assignment, 
provided the ROT is at the best price at which the order, quote or 
sweep is being traded. The assignment continues throughout the trading 
for each allocation, picking up where it dropped off from the last 
allocation, provided the ROT is entitled to an allocation. If odd lots 
arise when allocating interest among equally priced off-floor broker-
dealers, such odd lots are allocated in time priority, provided the 
off-floor broker-dealers is at the best price at which the order is 
being traded. Finally, with respect to Complex Orders, the Exchange 
notes in Rule 1080(n)(ii)(E)(2)(f) that residual odd lots will be 
allocated in time priority for Complex Orders.
    The Exchange believes that these amendments will provide market 
participants with more information on the allocation of these odd lots.
    Below are two examples, representing consecutive executions and 
allocations within the Order Book which demonstrates rounding and the 
allocation of remaining shares.
Example #1
    Presume an order of 200 contracts is being allocated in the 
Exchange's Order Book. Allocation will first occur with public customer 
orders at the best price filled in time priority, since public 
customers always have priority on the Exchange. Presume there are 63 
contracts remaining after public customer orders are filled. ROTS would 
be allocated next pursuant to Rule 1014 in pro-rata fashion. Presume 5 
ROTs are at the best price and the allocation of the remaining 63 
contracts, after public customer orders have been satisfied, is as 
follows:


[[Page 21938]]


ROT A 1.10(30) x 1.20(30)--25.2 rounded down to 25 contracts
ROT B 1.10(15) x 1.20(15)--12.6 rounded down to 12 contracts
ROT C 1.10(10) x 1.20(10)--8.4 rounded down to 8 contracts
ROT D 1.10 (10) x 1.20(10)--8.4 rounded down to 8 contracts
ROT E 1.10 (10) x 1.20 (10)--8.4 rounded down to 8 contracts

    After this pro-rata allocation, 2 contracts remain to be allocated. 
Presume for this trading day these ROTs are assigned the following 
order of assignment: First is ROT A, second is ROT B, third is ROT C, 
fourth is ROT D and fifth is ROT E. The 2 remaining contracts would be 
allocated as follows:

ROT A 1.10(30) x 1.20(30)--1 contract
ROT B 1.10(15) x 1.20(15)--1 contract
ROT C 1.10(10) x 1.20(10)--zero
ROT D 1.10 (10) x 1.20(10)--zero
ROT E 1.10 (10) x 1.20 (10)--zero

    The next order which results in contracts remaining after the pro-
rata allocation to ROTs will have such remaining contracts allocated 
one at a time beginning with ROT C since he was next in line based on 
that trading day's order of assignment, provided ROT C is at the best 
price with remaining interest.

Example #2
    Presume an order of 200 contracts is being allocated in the 
Exchange's Order Book. Presume all public customer orders and ROT 
interest that was at the best price have been filled and there remains 
9 contracts to be executed.
    Off-floor broker-dealers would be allocated next pursuant to Rule 
1014 in a pro-rata fashion. Presume 3 off-floor broker-dealers are at 
the best price and their interest had arrived in the following order. 
The allocation of the remaining 9 contracts is as follows:

Off-floor broker-dealer C 1.10 (5) x 1.20 (5)--4.09 contracts rounded 
down to 4
Off-floor broker-dealer B 1.10 (3) x 1.20(3)--2.45 contracts rounded 
down to 2
Off-floor broker-dealer A 1.10 (3) x 1.20(3)--2.45 contracts rounded 
down to 2

After this pro-rata allocation, there remains one contract to be 
allocated. This residual contract will be allocated in time priority as 
follows:

Off-floor broker-dealer C 1.10 (5) x 1.20 (5)--1 contract
Off-floor broker-dealer B 1.10 (3) x 1.20(3)--zero
Off-floor broker-dealer A 1.10 (3) x 1.20(3)--zero
Public Customers
    The Exchange is amending Phlx Rule 1080(n)(vi) to add more 
specificity concerning public customer orders. An Initiating 
Participant may enter a PIXL Order for the account of a public customer 
paired with an order for the account of another Public Customer and 
such paired orders will be automatically executed without a PIXL 
Auction, provided there is not currently an Auction in progress in the 
same series or the same strategy, in which case the orders will be 
rejected. This rule text makes clear that with respect to Customer-to-
Customer \19\ PIXL Orders, those orders will be rejected when an 
Auction is in progress. This non-substantive change adds more clarity 
to the rule text. The Exchange recently included this clarifying rule 
text in the newly adopted BX PRISM rule \20\ and seeks to conform the 
PIXL rule text to that of BX PRISM. Conforming changes are also made in 
Phlx Rule 1080(n)(ii).
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    \19\ These orders are customer retail orders.
    \20\ See BX Rules at Chapter VI, Section 9(vi).
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    The words ``or strategy'' in this context are not included in the 
BX PRISM rule because this language specifically relates to Complex 
Orders,\21\ which are not transacted on BX, but may be transacted on 
Phlx within PIXL.\22\ A Complex Order Strategy means a particular 
combination of components of a Complex Order and their ratios to one 
another. The Exchange will calculate both a bid price and an offer 
price for each Complex Order Strategy based on the current PBBO (as 
defined below) for each component of the Complex Order. Each Complex 
Order Strategy is assigned a strategy identifier by the System. With 
respect to Complex Order Strategies, the Exchange will permit an 
Initiating Participant to enter a PIXL Order for the account of a 
public customer paired with an order for the account of another public 
customer and such paired orders will be automatically executed without 
a PIXL Auction as long as there is not currently an Auction in progress 
in the same strategy. If there is an Auction in progress in the same 
strategy, the Customer-to Customer cross will be rejected.
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    \21\ A Complex Order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, priced at a net debit or credit based on 
the relative prices of the individual components, for the same 
account, for the purpose of executing a particular investment 
strategy. Furthermore, a Complex Order can also be a stock-option 
order, which is an order to buy or sell a stated number of units of 
an underlying stock or ETF coupled with the purchase or sale of 
options contract(s). See Exchange Rule 1080, Commentary .08(a)(i).
    \22\ See Phlx Rule 1080(n).
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    To further explain same strategy, where a PIXL Order creates a 
second Auction where there was already an a Complex Order Strategy 
Auction in progress with the same combination of components and the 
same ratios, that PIXL Order would be rejected. If the combination of 
components and ratios were not the same, the PIXL Order would not be 
rejected. Also, a simple and Complex Order Strategy Auction may occur 
at the same time. The Exchange believes that this approach is 
consistent with the general caveat in the PIXL Auction Rule 1080(n)(ii) 
that only one Auction may be conducted at a time in any given series or 
strategy.\23\
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    \23\ Rule 1080(n)(2) is being amended to conform to newly added 
rule text. While this section is being amended, the Exchange notes 
that the amendment is not material and the general caveat continues 
to apply.
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Non-Displayed Prices
    In certain instances, a resting order or quote may be internally 
priced at a non-displayed price and would differ from the PBBO. The 
Internal BBO or ``Reference BBO'' would differ from the PBBO in a 
situation where the System prevents trade-throughs and locked and 
crossed markets. Interest will not be executed at a price that trades 
through another market or is displayed at a price that would lock or 
cross another market. If, at the time of entry, an order or quote would 
cause a locked or crossed market violation or would cause a trade-
through violation, it will be re-priced to the current national best 
offer (for bids) or the current national best bid (for offers) and 
displayed at one minimum price variance above (for offers) or below 
(for bids) the national best price.
    The Exchange is proposing more precise rule text to account for 
these situations where there is an automatic repricing in order to 
prevent trade-throughs and locked and crossed markets. The Exchange 
proposes to change the rule text in relevant instances to acknowledge 
that repricing would result in the better of the NBBO (or PBBO) or the 
Reference BBO.
Conforming Change
    The Exchange proposes a change to Rule 1080(n)(ii)(G). The Exchange 
proposes to amend the sentence which states, ``[i]f the PIXL Auction 
price (except if it is a Complex Order) is the same as that of an order 
on the limit order book represented in the PBBO on the same side of the 
market as the PIXL Order, the PIXL Order may only be executed at a 
price that is at least one minimum price improvement increment better 
than the resting order's limit price or, if such resting order's limit 
price is equal to or crosses the stop price, then the entire PIXL Order 
will trade at the stop price with all better priced interest

[[Page 21939]]

being considered for execution at the stop price,'' to include the 
``represented in the PBBO text. The Exchange believes that this 
clarifying rule text conforms the sentence to the remainder of the rule 
text by referencing the relation to the PBBO. This is not a substantive 
rule change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \24\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \25\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, by allowing for an Auction period of no less than one hundred 
(100) milliseconds and no more than one (1) second and providing a 
meaningful opportunity for Phlx members to respond to the PIXL Auction 
while at the same time facilitating the prompt execution of orders.
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    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
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PIXL Timer
    Phlx believes the proposed rule change could provide orders within 
PIXL an opportunity for price improvement. Also, the shorter duration 
of time for the Auction reduce the market risk for all members 
executing trades in PIXL. Initiating Participants are required to 
guarantee an execution at the NBBO or at a better price, and are 
subject to market risk while their PIXL Order is exposed to other Phlx 
members. While other participants are also subject to market risk, 
those providing responses in PIXL may cancel or modify their orders. 
Phlx believes that the Initiating Participant acts in a critical role 
within the PIXL Auction. Their willingness to guarantee the orders 
entered into PIXL an execution at NBBO or a better price is the 
keystone to an order gaining the opportunity for price improvement. 
Phlx believes that allowing for an auction period of no less than one 
hundred milliseconds and no more than one second will benefit members 
trading in PIXL. Phlx believes it is in these members' best interests 
to minimize the Auction time while continuing to allow members adequate 
time to electronically respond. Both the order being exposed and the 
responding orders are subject to market risk during the Auction.
    While some members may wait to respond until later in the Auction, 
presumably to minimize their market risk, the Exchange believes that a 
majority of the orders would respond earlier in the Auction. Based on 
the Exchange's experience with the PIXL mechanism,\26\ Phlx believes 
that an Auction of no less than one hundred milliseconds and no more 
than one second will continue to provide all market participants with 
sufficient time to respond, compete, and provide price improvement for 
orders and will provide investors and other market participants with 
more timely executions, thereby reducing their market risk. The 
proposed rule allows people to respond quickly at the most favorable 
price while reducing the risk that the market will move against the 
response.
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    \26\ Phlx staff distributed a survey to all Phlx market maker 
firms inquiring as to the timeframe within which these market 
participants respond to an auction with a duration time ranging from 
less than fifty (50) milliseconds to more than one (1) second. An 
overwhelming number of the market maker firms that responded to the 
survey indicated that they were capable of responding to auctions 
with a duration time of at least 50 milliseconds. Of the thirty five 
(35) Phlx market maker firms that were surveyed, twenty (20) of 
these market makers responded to the survey and of those respondents 
100% indicated that that their firm could respond to auctions with a 
duration time of at least 50 milliseconds. This survey was conducted 
in May 2014.
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    Phlx believes that its members operate electronic systems that 
enable them to react and respond to orders in a meaningful way in 
fractions of a second. Phlx believes that its members will be able to 
compete within no less than one hundred milliseconds and no more than 
one second and this is a sufficient amount of time to respond to, 
compete for, and provide price improvement for orders, and will provide 
investors and other market participants with more timely executions, 
and reduce their market risk.
    Finally, with respect to system capacity, Phlx has analyzed its 
capacity and represents that it and the Options Price Reporting 
Authority (``OPRA'') have the necessary systems capacity to handle the 
potential additional traffic associated with auction transactions 
resulting specifically from the implementation of the Auction period of 
no less than one hundred milliseconds and no more than one second.
Immediate or Cancel
    The Exchange's amendment to remove certain uses of the term 
``rejected'' to instead refer to the term ``immediately cancelled'' 
complies with the Exchange Act because the replacement words provide 
more specificity to the rule text. Today, PAN Responses that do not 
comply with PIXL requirements are not eligible to participant in an 
Auction and will be immediately cancelled, after being reviewed by the 
trading system. The Exchange believes that system enforced criteria 
will promote just and equitable principles of trade and protect 
investors and the public interest. The Exchange believes this change 
adds more clarity to the rule text to differentiate rejections and 
cancellations.
Allocations
    The Exchange's amendment to make clear that under no circumstances 
will the Initiating Participant receive an allocation percentage, at 
the final price point, of more than 50% with one competing quote, order 
or PAN response or 40% with multiple competing quotes, orders or PAN 
responses, when competing quotes, orders or PAN responses have 
contracts available for execution is a rule change that makes clear 
that limitation to allocation in PIXL. This rule change adds more 
clarity to the rule text. This amendment is consistent with the Act in 
that it identifies the limitation in the PIXL allocation more 
specifically and memorializes that limitation.
    The Exchange's amendment to provide more specificity concerning the 
allocation to which an Initiating Participant is entitled, either 40% 
or 50% depending on whether there are one or more competing quotes, 
orders or PAN responses, is a change which adds more clarity to the 
rule text. This amendment is consistent with the Act in that it 
identifies with specificity the manner in which PIXL will allocate to 
an Initiating Participant.
    The Exchange believes that the new language of ``or 50%'' is 
consistent with the Act because the value added from Initiating 
Participants guaranteeing execution of Agency Orders at a price equal 
to or better than the NBBO warrants (to the extent that the Initiating 
Participants is on the final Auction price), an Auction allocation 
priority of at least the same percentage of the order as any competing 
Auction response, quote, or order when there is only one such response, 
quote, or order. The Exchange also believes that the proposed rule 
change, like other price improvement allocation programs currently 
offered by competitor exchanges, will benefit investors by attracting 
more order flow as well as increasing the frequency that Participants 
initiate Auctions, which may result in greater opportunities for 
customer order price improvement. These percentages remain competitive 
with the percentage of allocations

[[Page 21940]]

currently available on other options markets.\27\
---------------------------------------------------------------------------

    \27\ See BX Rules at Chapter VI, Section 9.
---------------------------------------------------------------------------

Stop Price
    The Exchange's amendment to revise language where the entire PIXL 
Order will be executed at, including, in the case of the PBBO crossing 
the PIXL Order stop price, the best response price(s) or, if the stop 
price is the best price in the Auction, at the stop price, unless the 
best response price is equal to or better than the price of a limit 
order resting on the PHLX book on the same side of the market as the 
PIXL Order, in which case the PIXL Order will be executed against that 
response . . .'' adds more specificity to the current rule text and 
accounts for responses at the best price, not just equal to other 
prices. The Exchange believes that the ability to price improve is 
consistent with the Act because it removes impediments to and perfects 
the mechanism of a free and open market and a national market system.
Professional Order
    The Exchange's amendment to make clear that a public customer order 
does not include a professional order is a non-substantive change which 
adds more clarity to the rule text. This amendment is consistent with 
the Act and other rule changes which make clear the distinction between 
professional and public customer orders.\28\
---------------------------------------------------------------------------

    \28\ See Securities Exchange Act Release No. 61426 (January 26, 
2010), 75 FR 5360 (February 2, 2010) (SR-Phlx-2010-05) (Notice of 
Filing of Proposed Rule Change Relating to Professional Orders).
---------------------------------------------------------------------------

Rounding
    With respect to rounding, all rounding is down to the nearest 
integer. If rounding of the Initiating Participant's allocation results 
in an allocation of less than one contract, then one contract will be 
allocated to the Initiating Participant, only if the Initiating 
Participant did not otherwise receive an allocation. The Exchange is 
permitting the Initiating Participant to receive the benefit of the 
rounding in an allocation of less than one contract, only if the 
Initiating Participant did not otherwise receive an allocation, because 
the Initiating Participant is not eligible to receive residual 
contracts. The Exchange believes that rounding differently for the 
Initiating Participant as compared to all other market participants is 
not unfairly discriminatory since the Initiating Participant is not 
eligible to receive residual contracts as are other market 
participants, unless no other interest is available to trade. The 
Exchange currently provides that rounding shall occur in a fair and 
equitable manner. The Exchange proposes to amend this rule to provide 
that rounding shall be down to the nearest integer. The Exchange 
believes that rounding down uniformly is consistent with the Exchange 
Act because it provides for the equitable allocation of shares among 
the Exchange's market participants. Also, this rule change will provide 
market participants with transparency as to the number of shares that 
they are entitled to receive as the result of rounding.
    The Exchange's amendment to indicate the manner in which odd lots 
are allocated among market participants for simple interest specifies 
that for ROTS, odd lots allocated among equally priced ROTs are by 
random assignment of ROTs each trading day in accordance with the 
trading day's order assignment, provided the ROT is at the best price 
at which the order is being traded. For off-floor broker-dealers, odd 
lots are allocated in time priority, provided the off-floor broker-
dealers are at the best price at which the order is being traded. The 
Exchange believes that the allocation of odd lots uniformly for all 
ROTs, and separately for all off-floor broker-dealers, is consistent 
with the Exchange Act because it provides for the equitable allocation 
of shares among the Exchange's market participants. With respect to 
off-floor broker-dealers, the method is consistent with the Act because 
it relies simply on time priority, an accepted method of allocation 
utilized by many options exchange to prioritize orders.
    Specifically, with respect to the allocation method for odd lots 
for ROTs, this random assignment is basically a round robin approach to 
the allocation. The Exchange believes that this method results in a 
fair and equitable allocation of shares of these market participants 
because each trading day the Exchange creates a new order of assignment 
to allocate ROTs and that order provided an independent method to 
assign evenly among ROTs. Also, each trading day that assignment 
changes so that no one ROT would have the ability to receive a greater 
allocation than another ROT. The Exchange believes that its assignment 
method is not subject to gaming since it is random and therefore 
complies with the Act because it is aimed at the protection of 
investors. Also, this rule change will provide market participants will 
transparency as to the number of shares that they are entitled to 
receive as the result of allocation odd lots.
    With respect to the allocation of odd lots for Complex Orders, the 
Exchange will allocate in time priority. The Exchange believes that 
allocating Complex Orders in time priority uniformly is consistent with 
the Exchange Act because it provides for the equitable allocation of 
shares among the Exchange's market participants. Also, this rule change 
will provide market participants will transparency as to the number of 
shares that they are entitled to receive as the result of allocating 
odd lots.
Public Customers
    The Exchange's amendment to add more specificity concerning public 
customer orders to indicate that a public customer paired with an order 
for the account of another public customer will be automatically 
executed without a PIXL Auction, provided there is not currently an 
Auction in progress in the same series or same strategy, in which case 
the orders will be rejected. This amendment makes clear that only one 
Auction may be conducted at a time in any given series is consistent 
with the Act and the PIXL approval order.\29\ This rule text makes 
clear that with respect to Customer-to-Customer PIXL Orders, those 
orders will be rejected when an Auction is in progress in the same 
series. This non-substantive change adds more clarity to the rule text.
---------------------------------------------------------------------------

    \29\ See Securities Exchange Act 63027 (October 1, 2010), 75 FR 
62160 (October 7, 2010) (SR-Phlx-2010-108).
---------------------------------------------------------------------------

    With respect to the words ``or strategy,'' the BX PRISM rule does 
not contain similar language because this language specifically relates 
to Complex Orders, which are not transacted on BX, but may be 
transacted on Phlx within PIXL. Similar to the manner in which the 
Exchange would treat two Auctions in the same series, the Exchange will 
permit an Initiating Participant to enter a PIXL Order for the account 
of a public customer paired with an order for the account of another 
public customer and such paired orders will be automatically executed 
without a PIXL Auction as long as there is not currently an Auction in 
progress in the same strategy. With respect to Complex Order 
Strategies, the Exchange will permit an Initiating Participant to enter 
a PIXL Order for the account of a public customer paired with an order 
for the account of another public customer and such paired orders will 
be automatically executed without a PIXL Auction as long as there is 
not currently an Auction in progress in the same strategy. If there is 
an Auction in progress in the same strategy, the Customer-to-Customer 
cross will be rejected. To further explain same strategy, where a PIXL 
Order would create a second Auction where there

[[Page 21941]]

was already an a Complex Order Strategy Auction in progress with the 
same combination of components and the same ratios, that PIXL Order 
would be rejected. If the combination of components and ratios were not 
the same, the PIXL Order would not be rejected. Also, a simple and 
Complex Order Strategy Auction may occur at the same time. The Exchange 
believes that this approach is consistent with the general caveat in 
the PIXL Auction that only one Auction may be conducted at a time in 
any given series or strategy.\30\ The Exchange does not permit more 
than one Auction to be conducted at a time in any given series and in 
this case also in a given strategy because the Exchange does not desire 
to have competing Auctions for the same series or strategy.
---------------------------------------------------------------------------

    \30\ See Securities Exchange Act 63027 (October 1, 2010), 75 FR 
62160 (October 7, 2010) (SR-Phlx-2010-108). See also Phlx Rule 
1080(n)(ii) which states, in part, ``Auction Process. Only one 
Auction may be conducted at a time in any given series or 
strategy.''
---------------------------------------------------------------------------

Non-Displayed Prices
    The Exchange's proposal to amend Rule 1080(n) for the addition of 
language to include the ``Reference BBO'' to clarify where the price is 
equal to or better than the NBBO or PBBO and the Reference BBO 
(internal market BBO), due to repricing for trade-throughs or locked 
and crossed markets, adds clarity and precision to the current rule 
text. The Exchange believes that it is consistent with the Act and does 
not otherwise create an impediment to a free and open market because 
today investors are subject to this repricing and have the opportunity 
to trade at a better price, which could result in better executions for 
investors. Also, by reflecting the proper rule text to account for 
these order types the Exchange is providing Participants with 
additional information with which to anticipate the manner in which the 
Exchange's trading system reprices interest to prevent a trade-through 
or locked and crossed market.
Conforming Change
    The Exchange's proposal to clarify Rule 1080(n)(ii)(G) to include a 
reference to the PBBO will conform the Exchange's PIXL rule text. This 
is not a substantive amendment. The Exchange believes that this 
amendment will provide further clarity to the PIXL rules.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change will 
conform the PIXL rule with the PRISM rule. The Exchange does not 
believe that the proposed changes produce an undue burden on inter-
market competition because these changes will afford Phlx the 
opportunity to compete for order flow by offering an auction mechanism 
similar to that of other exchanges, specifically BX.
PIXL Timer
    Phlx's amendment to the timer to a shorter duration of time for the 
Auction does not impose an undue burden on intra-market competition 
because Phlx believes that allowing for an auction period of no less 
than one hundred milliseconds and no more than one second will benefit 
members trading in PIXL. Phlx believes it is in these members' best 
interests to minimize the Auction time while continuing to allow 
members adequate time to electronically respond. The proposed rule 
allows people to respond quickly at the most favorable price while 
reducing the risk that the market will move against the response. Phlx 
believes that its members will be able to compete in no less than one 
hundred milliseconds and no more than one second and this is a 
sufficient amount of time to respond to, compete for, and provide price 
improvement for orders, and will provide investors and other market 
participants with more timely executions, and reduce their market risk.
Immediate or Cancel
    The Exchange's amendment to remove certain uses of the term 
``rejected'' to instead refer to the term ``immediately cancelled'' 
does not impose an undue burden on intra-market competition because PAN 
Responses that do not comply with PIXL requirements are not eligible to 
participate in an Auction and will be immediately cancelled after being 
reviewed by the trading system. The system enforced criteria will be 
applied uniformly to all Phlx members. The Exchange believes this non-
substantive change adds more clarity to the rule text.
Allocations
    The Exchange's amendment to make clear that under no circumstances 
will the Initiating Participant receive an allocation percentage, at 
the final price point, of more than 50% with one competing quote, order 
or PAN response or 40% with multiple competing quotes, orders or PAN 
responses, when competing quotes, orders or PAN responses have 
contracts available for execution does not impose an undue burden on 
intra-market competition. This rule change adds more clarity to the 
rule text. This amendment is consistent with the Act in that it 
identifies an existing limitation in the PIXL allocation more 
specifically and memorializes that limitation. The Exchange believes 
that the new language of ``or 50%'' does not create an undue burden on 
competition because this language is similar to language in BX PRISM 
and applies to all market participants utilizing Phlx.\31\ The 
Exchange's amendment to provide more specificity concerning the 
allocation to which an Initiating Participant is entitled, either 40% 
or 50% depending on whether there are one or more competing quotes, 
orders or PAN responses does not impose an undue burden on intra-market 
competition. This is a rule change adds more clarity to the rule text. 
This amendment does not impose an undue burden on intra-market 
competition, rather, it identifies with specificity the manner in which 
PIXL will allocate to an Initiating Participant.
---------------------------------------------------------------------------

    \31\ See NASDAQ BX, Inc. (``BX'') Rules at Chapter VI, Section 
9.
---------------------------------------------------------------------------

Stop Price
    The Exchange's amendment to revise language where the entire PIXL 
Order will be executed at, including, in the case of the PBBO crossing 
the PIXL Order stop price, the best response price(s) or, if the stop 
price is the best price in the Auction, at the stop price, unless the 
best response price is equal to or better than the price of a limit 
order resting on the PHLX book on the same side of the market as the 
PIXL Order, in which case the PIXL Order will be executed against that 
response . . .'' does not impose an undue burden on intra-market 
competition. Rather, this language adds more specificity to the current 
rule text and accounts for better priced orders.
Professional Order
    The Exchange's amendment to make clear that a public customer order 
does not include a professional order does not impose an undue burden 
on intra-market competition this rule change is consistent with the 
distinction between professional and public customer orders.
Rounding
    With respect to rounding, all rounding is down to the nearest 
integer. If rounding of the Initiating Participant's allocation results 
in an allocation of less

[[Page 21942]]

than one contract, then one contract will be allocated to the 
Initiating Participant, only if the Initiating Participant did not 
otherwise receive an allocation. The Exchange is permitting the 
Initiating Participant to receive the benefit of the rounding in an 
allocation of less than one contract, only if the Initiating 
Participant did not otherwise receive an allocation, because the 
Initiating Participant is not eligible to receive residual contracts. 
The Exchange does not believe that the proposal to round all remaining 
shares down to the nearest integer imposes an undue burden on 
competition because the Exchange will uniformly round in this matter.
    If there are contracts remaining, such contracts shall be allocated 
for simple interest after rounding by randomly assigning all ROTs an 
order of allocation each trading day, and allocating orders, quotes and 
sweeps in accordance with the trading day's order assignment, provided 
the ROT is at the best price at which the order, quote or sweep is 
being traded, except with respect to Complex Orders, which allocation 
is described in Rule 1080, Commentary .07. In the event that there are 
remaining contracts to be allocated for interest after rounding, such 
remaining contacts will be allocated in time priority, provided the 
off-floor broker-dealers are at the best price at which the order is 
being traded. Residual remaining shares will be allocated in time 
priority for Complex Orders.
    With respect to allocating remaining contracts, the Exchange does 
not believe that the proposal to allocate remaining contracts for ROTs 
by random assignment creates an undue burden on competition because the 
method, which is basically round robin, results in a fair and equitable 
allocation of shares of these market participants. The Exchange does 
not believe that allocating remaining contracts to off-floor broker-
dealers in time priority creates an undue burden on competition because 
the method will be applied uniformly among these participants. Finally, 
the Exchange does not believe that allocating remaining contracts to 
Complex Orders in time priority creates an undue burden on competition 
because the method will be applied uniformly to all transactions 
involving Complex Orders.
Public Customers
    The Exchange's amendment to add more specificity concerning public 
customer orders to indicate that a public customer paired with an order 
for the account of another public customer will be automatically 
executed without a PIXL Auction, provided there is not currently an 
Auction in progress in the same series or same strategy, in which case 
the orders will be rejected, does not impose an undue burden on intra-
market competition. This non-substantive change adds more clarity to 
the rule text. Also, the Exchange's amendment to add more specificity 
concerning public customer orders to indicate that a public customer 
paired with an order for the account of another public customer will be 
automatically executed without a PIXL Auction, provided there is not 
currently an Auction in progress in the same strategy, does not impose 
an undue burden on intra-market competition because this is consistent 
with the general caveat in the PIXL Auction that only one Auction may 
be conducted at a time in any given series or strategy.
Non-Displayed Prices
    The Exchange's proposal to amend Rule 1080(n) for the addition of 
language to include the ``Reference BBO'' to clarify where the price is 
equal to or better than the NBBO or PBBO and the Reference BBO 
(internal market BBO), due to repricing for trade-throughs or locked 
and crossed markets, does not impose an udue burden on intra-market 
competition, rather the more precise language adds clarity and 
precision to the current rule text. This additional information will 
provide all market participants with information to anticipate the 
manner in which the Exchange's trading system operates in PIXL 
Auctions.
Conforming Change
    The Exchange's proposal to clarify Rule 1080(n)(ii)(G) to include a 
reference to the PBBO to conform the Exchange's PIXL rule text does not 
impose an undue burden on intra-market competition because the 
amendment is non-substantive.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \32\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\33\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \33\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. Rule 
19b-4(f)(6)(iii), however, permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange requests that the 
Commission waive the 30-day pre-operative waiting period contained in 
Rule 19b-4(f)(6)(iii) so that Phlx make conform its current rule text 
to that of BX PRISM to compete effectively against this market. The 
Commission has determined to waive the 30-day operative delay in order 
to permit Phlx to implement without delay its proposed rule changes to 
incorporate recently-approved provisions in the substantially similar 
rules of BX. The Commission believes that such waiver is consistent 
with the protection of investors and the public interest as the 
proposed changes do not raise any material new issues that have not 
been previously considered by the Commission.\34\
---------------------------------------------------------------------------

    \34\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or

[[Page 21943]]

     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2016-40 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-40. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2016-40 and should be 
submitted on or before May 4, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08429 Filed 4-12-16; 8:45 am]
 BILLING CODE 8011-01-P


